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The Risks Of Being A Guarantor

Updated 24 May 2021 – By Team Loanstreet


Here's a question - are you a guarantor for anyone else? Usually, being a guarantor commonly materializes as a favour for a friend or family member. If so-so, memang no lah. It's not like you'll gain anything financially (there are even risks!).

Why is it risky? Financial institutions require guarantees to hedge their investment in case borrower defaults on regular repayments. This case highlights the lack of guarantor’s knowledge that they are legally responsible for the borrower. If you’re a guarantor, read on.

 

What You Need To Know About Being A Guarantor?

A guarantor is bound to a legal contract stating your obligation to clear up debts in the event that the borrower defaults. It's crucial that a guarantor understands what this actually means! Preliminary steps such as seeking advice from your lawyer are encouraged to minimize risks if any, though legal fees are to be born yourself.

It's true that anyone can be a guarantor but a few legal requirements need to be met. These are the following:

  • 18 years old or above
  • Must not be in the state of bankruptcy
  • Must have the mental ability to fully understand the guarantee document
  • Must be willing to accept the conditions without peer pressure

Some protections are given to guarantors. If a guarantee misses out a payment, financial institutions don't have the right to carry out any action against the guarantor unless the guarantee demands it. Upon the last debt payment, a guarantor is released from his obligations.

P/s: There are 2 types of guarantor - social and non-social. For your info, social guarantor here refers to when the borrower applied for education, home & vehicle loan. The rest are considered as non-social.

 

What Are Your Rights as a Guarantor?

According to this website, here are your rights before and after you signed the agreement:

  • Before signing;
    • Get a lawyer services before you sign (need to fork out own money)
    • Request all related documents regarding the agreement so that you'll understand it
  • After signing:
    • Ask the latest information such as current loan amount (need to have permission first)
    • Request the borrower to complete the payment so that you'll no longer be a guarantor
    • Ask the borrower to pay you back should you've paid to the financial institution (if the borrower doesn't pay)
 

Is it True You'll have to Pay if the Borrower doesn't?

Yup, that's right - but it's not that easy. Before (according to the Bankruptcy Act 1967), many guarantors will be chased by the banks if the borrowers messed up. Unfortunately, this brings another kind of problem - from the year 2007 until 2014, near to 7 thousand social guarantors bankrupted - it's because even they're unable to pay.

That's why the gahmen revised the act. No more guarantors getting the brunt as it's not their faults. Now, the banks need to do it first to the borrowers. Let say if the banks do anything to the guarantor, they need to have proof and evidence that they've done the same to the borrower but unsuccessful.

With the new act, the bank can't make any social guarantor bankrupt no more. For non-social, they still can but it depends on the court. If they're satisfied with whatever the bank have done, then they would consider.

 

Other Than That, What Are the Risks of Being a Guarantor?

1. Your credit score will be affected

Here's the thing, without a doubt that your credit score will be affected (whether the borrower pays or not). But if your credit score isn't looking so good, it'll be hard when you apply for any loan or investment later.

2. Your assets will be taken away

Not only that, your assets even will be controlled by the Insolvency Department to pay back the debt. Hopefully, it's enough to cover everything. 

3. Can go bankrupt (non-social guarantor)

It's without a question that the highest risk of being a guarantor is bankruptcy. But, what to do when both parties are unable to pay. It's just that the bank will need to wait for at least 6 years to make the first claim to the guarantor before any law action. Do note that this is only when the debt amount is similar or more than RM50 thousands.

 

Here Are Some Questions that You'll For Sure Ask

Q : If the borrower approaches financial institution requesting increase in the loan amount, is the guarantor liable to the increased amount?

A : No. By legal rights, the additional amount requires a separate guarantee, assuming the financial institution grants this. If borrower again requests you for the guarantor, you have a choice to accept or decline.

Q: How can the guarantor get removed from the contract?

A: Can, no prob - financial institution needs to approve first. They used to agree without any requirement or new guarantor. They could even decline the request until the borrowers have paid half to the full amount of the debt. 

Q: If one of the guarantors passed away, what'll happen?

A: Need to check back what kind of guarantee it is - whether joint guarantor or not. If it's a joint guarantor, the responsibility fells to the other guarantors. If it's for the other type, the next of kin will take over from the one that passed away.

 

Overall, that's why it's important to understand and check back the contact early on

Unless you're 100% clear, don't sign even one document. A guarantor should know its capability before agreeing to any documents legally. So, it's wise to put in extra thought into this matter.

If there is coercion or anything, just ignore. Especially when the borrower makes you feel bad for not agreeing. Trust your instinct - you know better!

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